by Calculated Risk on 9/18/2011 03:05:00 PM

There will be a two day meeting of the FOMC on Tuesday and Wednesday. This meeting was originally scheduled for one day, but was expanded to two days to allow for a "fuller discussion"¹ of "the relative merits and costs" of the "range of tools that could be used to provide additional monetary stimulus".
¹Words in quotes are from Fed Chairman's Jackson Hole speech on August 26th.

The FOMC statement will be released around 2:15 PM ET on Wednesday.

In July, during his Congressional testimony, Fed Chairman Ben Bernanke reiterated that another round of monetary accommodation (aka QE3) would depend on both a further deteriorating in the economic outlook and the renewed threat of deflation. Bernanke said: "[T]he possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support."

The recent inflation reports indicated an uptick in the core measures of inflation at just above the Fed's target. That would seem to argue against QE3. However Chicago Fed President Charles Evans recently argued that the Fed should remember the dual mandate and take more action:

[W]hen unemployment stands at 9%, we’re missing on our employment mandate by 3 full percentage points. That’s just as bad as 5% inflation versus a 2% target. So, if 5% inflation would have our hair on fire, so should 9% unemployment.

Clearly the economy is weaker than the Fed had expected, but I suspect there will be quite an argument about inflation.

QE3 is unlikely at the September meeting, but not impossible - however most observers think the FOMC will announce a program to change the composition of their balance sheet (extend maturities). It is also possible that the FOMC will announce a reduction in the interest rate paid on excess reserves (currently 0.25%).

Also the FOMC statement might change. It is possible that the outlook on the unemployment rate might be downgraded. From the August statement:

"The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate."

Many forecasters think the unemployment rate will start to increase again - or at least not "decline gradually". As an example, Goldman Sachs is forecasting the unemployment rate to rise to 9.3% in Q4, and to hold flat at 9.4% in 2012.

Of course the key sentence "economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" will remain.

Yesterday:
• Summary for Week ending September 16th
• Schedule for Week of Sept 18th
• Links for Sovereign Debt Series